U.S. Equities

Market volatility continues to increase as investors price in the economic impact of COVID-19

On March 17, 2020, the VIX closed at an all-time high (82.7), surpassing levels from the height of the Financial Crisis in 2008.
March 2020

On March 17, 2020, the VIX closed at an all-time high (82.7), surpassing levels from the height of the Financial Crisis in 2008. The S&P 500 is down more than 25% from its February 16, 2020 peak.

The Energy sector continues to lag, returning -48% over the last month (crude oil prices -50%), followed by Financials (-33%) and Industrials (-31%). Lower risk stocks in Consumer Staples have outperformed (-11.6%), while Pharmaceuticals (-10.9%) have helped support returns for the Health Care Sector (-16.5%).

Investors positioning for a U.S. recession

As concerns over the spread of COVID-19 have intensified, investors have started to position for a U.S. recession. “Panic selling” has accelerated the continued underperformance of value as a style of investing. This is tied directly to the outperformance of more expensive, defensive stocks in the U.S. equity market.

As a result, valuation drawdowns have worsened. This is by far the longest drawdown in our historical dataset, with a maximum drawdown that now matches peak drawdowns from the tech bubble. In fact, since December 31, 2019, the drawdown has gone from -20% to -35%.

Valuations spreads widening...

Consequently, valuation spreads continue to widen, and are now at a 3.3 standard deviation extreme as compared to a 1.5 standard deviation extreme at the end of 2019. This again highlights the extreme move in Q1 2020.

This continues to support our thesis on the long-term relative attractiveness of valuation. Value typically shares cyclical exposure, and today, has more interest rate sensitivity than normal. While timing is still uncertain, we believe value should lead in a recovery and strongly believe it should outperform going forward for long-term investors. 

...and market breadth narrowing

In addition, market leadership has narrowed, as seen by a 2 standard deviation narrowing in market breadth, which happened entirely during Q1 2020. Narrow market breadth is a leading indicator for a momentum reversal.

Portfolio positioning

From a portfolio positioning standpoint, we continue to maintain value exposure while adding to quality names that were too expensive but are now more reasonably priced.

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Disclosures

Views and opinions have been arrived at by BMO Global Asset Management. The information, estimates or forecasts provided were obtained from sources reasonably deemed to be reliable but are subject to change at any time. This publication is prepared for general information only; it should not be construed as investment advice or relied upon in making an investment decision. All investments involve risk, including the loss of principal. Past performance is not a guarantee of future results.

The VIX Index refers to the Chicago Board Options Exchange Market Volatility Index and is a measure of implied volatility of S&P 500 index options. The S&P 500 is an unmanaged index of large-cap common stocks. Investments cannot be made in an index.

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